CJM Wealth Advisers breaks down third quarter 2026 market performance and what to watch for the rest of the year.
The third quarter delivered the best corporate earnings season in five years, and the stock market barely noticed. S&P 500 earnings for the second quarter came in roughly 50% higher than a year earlier, yet the index finished the third quarter up only about 2%. Bonds lost ground.
The reason was interest rates. In this update, Parker Trasborg and Kevin Donovan, CJM’s Portfolio Research Director, walk through what happened, why bond yields took center stage, and the changes we’re making in client portfolios as a result.
Strong Earnings Ran into Rising Rates
Earnings were the good news of the quarter. Companies reported results well ahead of expectations, with a large share of the growth coming from a handful of the biggest technology names.
Rates were the bad news. Oil prices climbed through the summer, pushing up the cost of gasoline and especially diesel, which works its way into the price of almost everything that gets shipped. Investors started expecting higher inflation, and on September 16 the Federal Reserve raised its benchmark rate by a quarter point to a range of 3.75% to 4.00%. It was the Fed’s first increase since July 2023.
Higher rates act as a brake on the economy. That’s why a quarter with excellent earnings still felt sluggish.
The Magnificent Seven Carried the S&P 500 Again
The Nasdaq led the major indexes with a gain of about 2.5% for the quarter. The S&P 500 rose about 2%, international stocks were roughly flat, the Dow slipped, and the broad U.S. bond market fell about 3.5%.
That 2% gain for the S&P 500 is a little misleading. AI-related stocks sold off sharply in late July, then recovered quickly, and NVIDIA, Microsoft, Meta, and Apple ended up as the biggest contributors to the index’s return. Value stocks, smaller companies, and international stocks lagged. Depending on how a portfolio was diversified, some clients may have seen slightly negative returns for the quarter even though the headline index was up.
Why the 10-Year Treasury Yield is the Story to Watch
The 10-year Treasury yield started 2026 around 4.2%. In September it jumped, ending the quarter near 5.3%, its highest level since 2007.
When yields rise, the prices of existing bonds fall, because newer bonds pay more. That hit core bond funds and municipal bonds this quarter. Small-company stocks felt it too. Many smaller companies rely on floating-rate loans, so when rates go up their borrowing costs rise right along with them, while larger companies are usually better insulated.
The full-year picture is more encouraging. Through the end of September, the Nasdaq was up about 15.5% and the S&P 500 about 12%, while bonds were down roughly 3% for the year.
How We’re Adjusting Portfolios
We’ve been moving more of our fixed income allocation into short-duration bond funds. These funds are less sensitive to interest rate changes, so they tend to lose less than longer-duration core bond funds when rates rise. Right now they also pay about the same level of income, which means we aren’t giving up yield to reduce that risk.
We expect bond yields to be the main driver of markets in the months ahead, and we’re watching them closely.
What We’re Watching into Year-End
One surprise this quarter was how calm markets stayed heading into the November midterm elections. Volatility usually picks up in the weeks before an election, and so far it hasn’t. Historically, markets have tended to do better once a midterm election is behind them and that layer of uncertainty clears. History is no guarantee, but it’s a pattern we’ll be watching through the end of the year.
In the coming weeks we’ll be recording a conversation with Ben Harris, Director of Economic Studies at the Brookings Institution. If you have a question you’d like to ask him, submit it here.
Frequently Asked Questions
Why did bonds lose value when the Fed raised rates?
Bond prices move in the opposite direction of yields. When the 10-year Treasury yield rose from about 4.2% to about 5.3% this year, bonds issued at lower rates became less valuable, and the broad bond market fell about 3.5% in the third quarter alone.
What is a short-duration bond fund?
It’s a fund that holds bonds maturing relatively soon. Because the money comes back sooner and can be reinvested at current rates, these funds are less sensitive to rising rates than funds holding longer-term bonds.
Why do rising rates hurt small-company stocks more than large ones?
Smaller companies often borrow through floating-rate loans, so their interest costs climb as soon as rates rise. Larger companies more often lock in fixed-rate financing.
Watch the full Q3 2026 Market Update above for Parker and Kevin’s complete discussion.
Social Media